It takes time to build a reputation in the eyes of creditors. You gain ‘points’ for never being chased by collection agencies, for having a glowing rental history or for always paying your bills on time. You have to be able to demonstrate a good track record of paying off your debts when you have them so your lender can see you are reliable.
Without a good credit rating it’s much harder to take out a loan for your dream home or car, or apply for a credit card for your overseas trip. Ultimately it’s your ticket to building trust with the bank.
Firstly, if you don’t have any official credit history, it is time to start. Everything from having a mobile phone plan, putting the electricity, gas or internet bill in your name or having your name on a lease will all contribute to your credit profile. If you let these sorts of payments fall by the wayside you are on your way to leaving a dirty smudge on your credit history. However paying these bills off monthly and on time demonstrates you are able to stay on top of the money you owe, and will leave a more impressive imprint on your record.
If you can demonstrate you have job stability this will also work in your favour. Changing jobs every 6 months or so suggests you might not be able to hold a job down. Your chosen bank wants to know you have a regular pay cheque coming. A solid employment history will boost your chances of taking out a loan considerably. As well as staying put at work, it also helps if you stay put in the same abode rather than house hopping too regularly. No bank wants to give a drifter a $10,000 credit card.
Stash your Savings
Did you know you can actually build credit history through your savings history as well as your spending? Demonstrate you have the discipline to put away a certain percentage of your earnings into a separate savings account. Maintain a reasonable balance and lenders will be more inclined to lend you money.
Once you reveal your reliability and signal savings steadfastness you will be better placed to apply for a credit card or loan. It is generally easier to be granted approval for a credit card than a loan, so consider applying for a credit card initially as a way to build your credit history and develop discipline with debt management.
Being able to demonstrate prompt on-time payment is the best way to show lenders you can responsibly manage debt. To begin with, keep the limit on your credit card as low as possible. Many people don’t realise that having a credit card with a high limit can actually reduce their borrowing power (say you have a card with a $10,000 limit, this will be included as potential debt when a bank is assessing your situation). It’s also a good idea to apply for only one credit card at a time, rather than trying at a number of institutions until one is approved, as each of your applications will be added to your credit file. It’s also best to only have one active credit card while you build your credit rating. Demonstrate your ability to keep on top of those payments first.
Review Your Rating
You are entitled to access your own credit file every 12 months (or within 90 days of having a credit application rejected). Ensure there are no errors on your file. If you find mistakes on your credit rating you need to take steps to ensure your credit file is corrected so it’s an accurate reflection of your credit history. You’ll need to contact your credit provider as well as the credit reporting agency to report the errors and begin the process of correcting your file.
Return from the Red
If you have already encountered longstanding debt (and possibly had Debt Collectors chase you down) you will need to clean up the mess and get back on your feet. First thing to do is pay off existing debts. Trying to avoid paying what you owe will only make things worse. Before building your savings eliminate your debt. Do it bit by bit, the most you can manage, one bill at a time. Don’t be afraid to contact service providers such as electricity and phone companies and let know them know you will be paying your bills little late. It is better they know this in advance and will be less likely to get the debt collectors onto you if you are upfront with them. Develop a relationship with your bank and reach out if you are struggling with repayments.
If you have existing credit card debt then your goal should be to stay on top of the monthly minimum payments as a bare minimum. Consider getting a second job to help with cash flow and get back on track. Gradually pay down what you owe and find ways to reduce your expenses. Set yourself a budget. Include all essential living expenses, prioritise these and eliminate the rest. Keep track of how much you owe so you can plan ahead and stay on top of your finances. It may be some time before you have a credit application approved if you have a history of bad debts. But this doesn’t mean you can’t build toward a healthy financial future over time. Once your debts are paid off, build your savings and become the Master of your own money story.
Speak with a financial counsellor to support you in developing healthy financial habits if debt is an ongoing issue for you. This is different to ‘debt consolidating’ or services provided by ‘refinancing’ companies. While these services may provide a certain level of ‘financial counselling’, ultimately they will charge you for their time. Financial counselling is a free, confidential service for people struggling with debt or financial hardship. A financial counsellor is a skilled professional who can assess your financial situation and provide advice around how to best move forward in order to resolve your difficulties.
Alison Gallagher is a freelance writer, resourcefulness expert and entrepreneur. She has been featured in various publications including Stellar Magazine, Australian Health and Fitness Magazine, and Cleo Magazine. Alison is particularly passionate about sharing practical tips on how to live simply, sustainably and seasonally.